Price and value

The English language makes financial statements confusing and therefore misleading

All financial statements are prepared in accordance with accounting policy note which is specified by the Australian Accounting Standards Board (AASB).

AASB 101 in paragraph 117 in relation the disclosure of accounting policies states “An entity shall disclose its significant accounting policies comprising: (a) the measurement basis (or bases) used in preparing the financial statements; and (b) the other accounting policies used that are relevant to an understanding of the financial statements”

Paragraph 118 states “It is important for an entity to inform users of the measurement basis or bases used in the financial statements (for example, historical cost, current cost, net realizable value, fair value or recoverable amount)”.

Google and the Oxford dictionary define value when used as a noun as; something of importance, merit, usefulness, desirable where as when value is used as a verb it is defined as estimate of monetary worth.  

Google and the Oxford dictionary therefore allow for the interchange of the word value and price.

This is very confusing because for the general public value and price have completely different meanings.

For example, the saying that a person “knows the price of everything and the value of nothing” makes no sense if value and price have the same meaning.

So even though paragraph 118 above talks about value in “net realizable value” and “fair value” it is in fact talking about price.

Most accountants are probably thinking we do not need to be concerned with semantics. However, let’s look at a company like British and American Tobacco and their financial statements. In short, the more cigarettes they sell the greater the profit the greater their net assets and the greater the number of deaths from lung cancer in the future.

Where is the value in that?

British and American Tobacco financial statements are definitely prepared on the basis of price not value.

Not For Profit entities are interesting beasts and highlight the issues in relation to the financial statements we produce.

The current financial statements being produced are vitally important to proper governance and the ability of management to know that can pay debts as and when due. However, in relation to maximizing the positive impact the Not For Profit entity has on its constituents the current financial statements are meaningless. Often the goods and services provided to constituents are provided at less than cost or free of charge so the profit and loss statement is misleading to say the least. All the profit and loss statement is really doing is showing cash in and cash out for the period.

A separate set of financial statements needs to be produced not based on price but on value, value provided to its constituents and value provided to society.

The concept of providing a separate set of financial statements is nothing new. Monash University Professors Graham Peirson and Scott Henderson’s final year accounting text “Issues in Financial Accounting”, first published in 1975 addresses this issue. Pages 333 to 355 and includes financial statements for a USA company Abt Associates Inc which produced an additional set of Social Value financial statements in 1973.

There has been little progress in the previous 46 years and there is now a worrying concern with the Australian Accounting Standards Board.

The Accounting Standards Board has temporarily deferred the commencement of AASB 16 Leases. To summarize, AASB 16 Leases requires a beneficiary of a peppercorn rent to capitalize the difference between the peppercorn rent and the market price by crediting the profit and loss statement and debiting an Intangible Asset on the balance sheet with the gross difference over the term of the lease. From then each year they should expense the annual difference between the market value and the peppercorn amount. There is now another accounting standard which requires an entity which user’s volunteers to bring the value of the volunteers on to the profit and loss statement as revenue and to have a corresponding expense amount in the same year.

It appears as if the Accounting Standards Board is dreaming, does not understand the purpose of financial statements and does not understand that by mixing price and value in the one set of financial statements you will only confuse the reader of financial statements. There is a place for value financial statements but it must be separate to the current set of financial statements being produced.